Ahead in the Count

Ryan Howard and the New MORP

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Just days after my two-partseries introduced the new MORP to evaluate baseball contracts, the Phillies provided me with an excellent opportunity to put it into action by signing Ryan Howard to a five-year contract extension yesterday.

The deal extends Howard’s contract to cover 2012-16 for a guaranteed $125 million, while providing the Phillies with an option for 20107 that would make the deal worth $138 million in total. The Phillies will also miss out on two all-but-guaranteed picks in the first or second rounds of the 2012 amateur draft in the form of compensation if he had departed. I showed last week that the value of these picks would be roughly $23 million, which means that this is really a deal where the Phillies are choosing between Ryan Howard from 2012-16 at $148 million, or Ryan Howard from 2012-17 at $161 million.

If you listened to the roar of the sabermetricians, you would think the Phillies had thrown nine figures at Juan Castro. You got to hear the same tired claims about Howard trotted out again. These include the "he’s a platoon player" argument, the "he can’t play defense" argument, and the "he’s slow" argument. You have probably already read analyses comparing Howard to Mo Vaughn and Cecil Fielder, and predicting his imminent demise.

On the other hand, if you listened to the roar of the old-school writers, you would think the Phillies had stolen an MVP off the market at a discount. The same tired statistics like runs batted in would have rung through your ears, and assertions about dynasties secured would have undoubtedly hit your eyeballs during your surfing.

The reality is that Howard falls somewhere between these two extremes. The contract is far from spectacular, but it is unlikely to be an albatross. The deal will ultimately come down to two primary factors, neither of which can be properly estimated by either group of commentators: the rate at which Howard ages, and the rate at which the price of a win inflates. Obviously, if Howard ages gracefully and produces well into his thirties, the Phillies are probably going to be getting a great bargain. Equally obviously, if he tanks, the Phillies are in trouble. If major-league salaries inflate the way that they did during the middle of the 2000s, Howard is going to have plenty of leeway to age without being useless; if salaries hold steady like they have over the last few years, Howard is not only going to need to maintain his production, but might need to learn to pitch, too, in order to be worth his salary.

First, let’s talk about the price of a win with a brief refresher of the new MORP, and discuss the kind of production that the Phillies would need from Howard under a few different salary inflation scenarios. After that, I will make the case that this deal is probably a fair one after all, or at least it’s not the albatross that others are claiming.

What Does He Need to Do to Make It Worthwhile?

Last week’s MORP articles explained that the price of 1.0 WARP3 in 2010 is approximately $5 million. This is in contrast with FanGraphs’ claim of approximately $4 million per WAR. These numbers are even further apart when you considering the fact that 1.0 WAR is worth about 1.16 WARP3, meaning that FanGraphs’ numbers are suggesting that 1.0 WARP3 is worth only $3.5 million. The reason that this analysis is inaccurate is that FanGraphs neglected draft-pick compensation, which ignores about 11 percent of total compensation, and it also looked at only the first year of contracts. Since a number of contracts went out to players unlikely to age well this past offseason, average annual value (or AAV) is a particularly poor way to evaluate these deals. As a result, FanGraphs appears to believe that the price of a win went down over 10 percent during an economic recovery from the worst recession in decades.

The new version of MORP provides a more accurate estimate of the cost of a win, which is approximately $5 million for 2010. However, Howard’s deal does not begin until 2012, and extends as far as 2017 if the Phillies pick up the option. I have made a conservative estimate that salaries will inflate at five percent on average for the sake of picking a number, but salaries could really do any number of things. Reports have suggested the salaries inflated at about 8-10 percent during the mid-2000s, while inflation for 2008-10 appears to be about one percent.

The reality is that we do not know how much inflation will be. If it’s two percent, the Phillies are in trouble, but if it’s 10 percent, they are in decent shape. One of the best aspects of this contract is that the option actually takes advantage of this uncertainty. Howard could be anywhere from replacement level in 2017 to a perennial four-win bomber.

How so? If salaries inflate 10 percent and Howard turns into the four-win bomber (a perfect scenario), he will be worth $39 million in 2017 but will only get paid $13 million. On the other hand, if salaries inflate by two percent and Howard turns into a zero-win player (a disaster scenario), Howard will be worth zero. If Howard is equally likely to be worth anywhere from $0-$39 million, but the Phillies only have to pay him $13 million if he is worth $13 million, then effectively they have a one-third probability of not picking up the option, and a two-thirds probability of picking up an option worth somewhere between $13-$39 million for the price of $13 million. On average, this is worth a net $13 million if it is picked up, which will only happen two-thirds of the time, meaning that the value of the option is about $9 million. The cost of the option (the guaranteed portion/buyout) is $10 million; effectively, the option is worth what it costs, meaning that we really only need to analyze the five-year, $115-million dollar deal.

Let’s consider the WARP3 that Howard would need to produce to be worth his contract if there is two, five, or 10 percent salary inflation. Let's start with the scenario where salaries only inflate at two percent, so that the price of a win would change like so:

2012: $5.2 million
2013: $5.3 million
2014: $5.4 million
2015: $5.5 million
2016: $5.6 million

Howard will get paid $20 million in 2012 and 2013, and $25 million in 2014, 2015, and 2016. Also, if we spread the $23 million opportunity cost of foregoing draft-pick compensation across the five guaranteed years, we can think of this as $24.6 million for 2012 and 2013, and $29.6 million for 2014, 2015, and 2016.

Thus, Howard would need to produce as follows to be exactly worth his contract each year:

Considering Howard will be 36 in 2016 and produced 5.1, 3.7, and 4.8 WARP3 from 2007-09, it appears that he would need to actually improve to be worth his contract if salaries inflate at only two percent annually.

Now, let's suppose that salaries inflate at five percent. In that case, the price of a win would go to about:

2012: $5.5 million
2013: $5.8 million
2014: $6.1 million
2015: $6.4 million
2016: $6.7 million

In that case, Howard would need to produce at the following clip to be worth his deal in each year:

All of a sudden, this starts to look like it could very well be a decent deal. Ultimately, the question is whether Howard is likely to age gracefully or not, because if he becomes a below-average player by the end of the contract or becomes merely average in the middle of the deal, even a high inflation level won’t cut it.

This contract actually starts to look terrific when you consider the possibility that the next collective bargaining agreement (after the current one ends after 2011) could remove draft-pick compensation. If that does happen, and salaries rise as I predicted in my MORP series, then even the five percent salary inflation looks quite plausible for Howard to achieve, and if the outcome of the next CBA does not allow for draft-pick compensation, this could easily turn into a good deal:

The $100-million question that needs to be answered is how well Howard will age. There are a slew of comparables that we can discuss, and I will elaborate on those players in a minute, but the most important clue about Howard’s aging process is the fact that the Phillies chose to re-sign him. Is that because the Phillies are geniuses? No; the real reason is that the Phillies know more about Howard’s body, habits, and character than any of the analysts attempting to evaluate the deal from afar. That’s not unique to the Phillies; that’s something that holds true for all teams who re-sign their players. To go back to last month, I published the following table of how much of a player’s total WARP3 are produced in each year of multi-year contracts. You will notice something very different between players who re-signed with their teams and players who signed with new teams:

Players who re-sign with their teams seem to hold up very well overall, even improving over two-year contracts while barely losing value in three-year and even four-year deals. On the other hand, players who sign two-year and three-year contracts with new teams usually decline drastically. The reason is selection bias. If you know a player’s body, habits, and character, you can get a better sense of how well he might age.

To bring this back to the specifics with Howard, the media reports that appear every spring training are often too clichéd to be taken seriously, but the fact is that Howard has lost noticeable amounts of weight during each of the last two offseasons. He’s gone from a defensive liability to average in both categories as he has gotten lighter. Consider his defensive numbers according to Mitchel Lichtman’s UZR and Baseball Info Solutions’ Defensive Runs Saved (DRS):

Year

UZR

DRS

2005

7.3

12

2006

-1.0

-8

2007

-1.3

0

2008

1.8

0

2009

2.0

-1

2010

-0.4

2

As far as specifics, Howard may have a terrible arm, but his fielding skills are pretty average and are even improving a little bit. If you watch him in the field, the numbers are confirmed by observation as well. He struggled terribly with ground balls on his glove side early in his career, but he has worked hard and now makes these plays rather well.

To move to one of the other criticisms of Howard, many have claimed that Howard is slow, but he is only a mildly below-average runner. In fact, since his worst season in 2007, he has even improved a little on the base paths, stealing eight bases in nine tries in 2009. Look at Howard’s Equivalent Baserunning Runs (EqBRR) over the course of his career:

2006: -3.2
2007: -4.9
2008: -3.6
2009: -3.4
2010: -0.5

Ultimately, the claims that Howard’s defense and baserunning make him a liability are not true. Though these skills may both decline over time, the Phillies are in a better position to evaluate this than the average analyst. Defense and baserunning often decline because of a player's physical condition, and the Phillies know Howard's body better than anyone. Ultimately, it’s hard to believe the Phillies would have signed Howard to this contract so far in advance of free agency if he had physical problems.

There is also another common, ill-founded criticism of Howard, one which I have called the 'Ryan Howard Can’t Hit Lefties Myth', which I also followed up on in last year’s Baseball Prospectus Idol competition. There are two reasons that people think this is true. One is that they do not know how poorly platoon splits hold up over time: the sample size is rarely large enough, so even an extreme platoon split can be expected to be scaled down the following year. The other reason this myth persists is because people only focus on the difference between Howard’s performances versus right-handed pitching and left-handed pitching, than the actual performance against lefties. While his 2009 troubles against left-handers was very notable, his career OPS against them is 752; the league average left-handed hitter had a 703 OPS against left-handers last year. Howard’s career OPS against same-handed pitching is roughly average for a first baseman. In contrast, his anomalous 1063 OPS against right-handers is so devastating that they intentionally walk him as often in a season as some hitters draw walks overall.

Of course, all of this was just to show that Howard is roughly a 4.5-win player at this stage in his career. The real question is how well he will age. To see the difference between the critics of this deal and its proponents, you only need to look at Ryan Howard’s list of comparables, which includes Willie Stargell, Willie McCovey, and Jim Thome, all whom aged very well and put up elite seasons well into their 30s. The list also includes players who fell off a cliff, like Mike Epstein and Cecil Fielder.

The question is which of these groups of players is Howard most like. Last year, I looked at Howard’s list of comparables according to both PECOTA and Baseball-Reference.com and I noticed an interesting difference between each set. I will reproduce this chart from last year below:

What you should notice is that, for the most part, the players who aged better were the ones who hit more home runs to the opposite field. On the other hand, pull-happy hitters like Fielder and Jose Canseco (who was on last year’s list of Howard comparables) fell apart more quickly. Howard’s batted-ball profile actually looks a lot like Thome’s. That is a good sign, as Thome continued to rack up four- and five-win seasons through most of his mid-30s. If this is what happens to Howard, the deal will look like a major success.

It is tough to tell exactly what will happen to Howard, but if he ages like the Phillies think he will, this deal will be a fair one, if not even a little bit of a bargain in the event of major salary inflation.

So It Might be Worthwhile... But Is It Werth-While?

The fear among Phillies fans is that this deal might have eliminated the possibility of re-signing right fielder Jayson Werth, whose contract expires at the end of this season, which would allow him to become a free agent. This is a false tradeoff, which is the result of assumptions about constant budgets that are not related to winning.

The belief that fans have is that the Phillies won’t be able to afford Werth. The myth here is that teams spend money to be nice to their fans, but only up until they reach some arbitrary budget, and then they stop. This is untrue: teams spend money to make money. What the Phillies probably cannot afford is to spend $150 million a season on a .500 team that never nets them playoff revenue.

The Phillies have essentially committed to spending enough money to be competitive during the time period that Howard is under contract. The Phillies have a lot of contracts expiring after 2011 and may soon become underdogs to strong young Braves squads. However, if the contracts of Howard, Jimmy Rollins, Brad Lidge, Ryan Madson, and Raul Ibanez had all expired after 2011, and Cole Hamels was a year away from free agency, the Phillies could have chosen to fold and spend less money. What they have done by signing Howard is commit to having a lot of money already spent during those years, unless they trade players. They have also recently extended the contracts of Shane Victorino and Joe Blanton through 2012, further indicating their commitment to spend a lot of money during these years. The reality is that if the Phillies think they are going to have to choose between being a $140-million team that is average in 2012 or a $160-million contending team in 2012, they are going to find the latter more profitable.

This impacts Werth’s signability less than you might think, even considering their payroll trend of the past few years, which has gone from $98 million in 2008 to $113 million 2009 to $138 million in 2010. Werth is a player who is worth about four wins per year as well, and will also probably be a Type-A free agent. Thus, he would likely get a contract comparable to the four years and $66 million Jason Bay signed with the Mets over the winter, maybe a bit more with salary inflation. Assuming that this is around five percent or so, this will probably check in around $20 million, as will Rollins if they choose to re-sign him after 2011.

The Phillies have already committed $134.7 million for 2011, and that will be bumped to around $137 million after Ben Francisco and Greg Dobbs are paid and maybe $140 million after re-filling some bench and bullpen jobs. They are already spending $138.2 million this year, so giving Werth about $15 million in the first year of his contract (assuming it is slightly back-loaded) would put them at about a 10-percent increase in payroll between 2010 and 2011. Of course, re-signing Werth would probably entail trading Ibanez and eating some of his contract, as left-handed hitting prospect Domonic Brown will probably be given one corner outfield position in 2011. It only makes sense that Brown would replace the left-handed hitting Ibanez. Eating half of Ibanez’s salary would put the Phillies under $150 million, a perfectly reasonable and possible number for a team that has been spending more and more in recent years. Even if Ibanez struggles greatly in 2010, there is probably a market for him at $6 million, which is half his 2011 salary.

They currently have $86.9 million committed in 2012, but after arbitration adjustments for Hamels, Francisco, and J.A. Happ, and filling a few bullpen and bench roles that are not yet filled, that will be closer to $115 million. Rollins and Werth at around $20 million each fits in perfectly. This process would entail salaries inflating from about $138 million 2010 to $148 million in 2011 to $155 million in 2012.

Things are hazier after 2012, as much depends on whether the Phillies re-sign Cole Hamels, but the Phillies seem pretty committed to locking down their own stars, so that could happen as well.

Conclusion

This is not the apocalypse. The salaries look gaudy, but it’s quite reasonable to expect that the best players in the league are making $40 million by the time this contract is over. Alex Rodriguez isn’t going to be the best player in baseball when he’s earning $28 million in 2013 either. The market will probably move past these numbers. Every time a large contract for an elite player is signed, analysts make the mistake of comparing the player to the players who currently make that salary level. Adjusting for inflation makes this far less scary.

This deal actually makes a lot of sense when you consider the fact that the Phillies probably have a lot of inside information about Howard’s likely aging pattern. Teams have shown that they do a very good job of re-signing only the players who will age gracefully. If Howard can at least be an above average player for the majority of this contract and salaries inflate like they have in other expansions, this deal will probably come out looking fair. I still think it’s probably a little on the high end, given the opportunity cost of two draft picks that they could have received in 2012, but this is hardly a contract that is sure to debilitate the franchise for years to come.

For Phillies phans, this is actually a great sign. The Phillies have committed a lot of money already to the middle of this decade, which is now a sunk cost. The Phillies are that much closer to remaining competitive during those years, and are far more likely to spend the money they need to spend to keep up with the rising Braves in the NL East. This deal could end up making phans happier, even if it was more than the Phillies would have needed to spend for his production.

Teams know about their own players. Both the Jimmy Rollins five-year deal during 2005, and the Chase Utley seven-year deal after 2006 were called into serious question by analysts. The fact is that the Phillies know their guys very well. If the Phillies think Howard is healthy and in good enough shape to age well, I am inclined to take that judgment into account.

Matt Swartz is an author of Baseball Prospectus. Click here to see Matt's other articles.
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Okay Matt, nice try. Really. Maybe with super high inflation things work out just fine. Maybe he can hit lefties, maybe the fact that he has like +200 OPS with runners on and way more such opportunities than comparable hitters will not change when utley and jrol slow down, maybe other hitters wouldn't get boosted nearly as much by hitting in citizens bank (i know, he hits just as many homers on the road).

For those who are interested Baseball Prospectus' proprietary projection system has this to say about Howard-2012-16
2.7
2.6
2.1
1.7
1.6

Maybe if it reweighed him at 235 it'd see that beautiful man coming out?

I don't need to multiply those numbers by your dollar figures. Let's put it this way, he's going to make almost as much as Joe mauer got for similar years in a similarly timed deal. Yes he's less injured than joe mauer, but Mauer is a better baseball player, lets not mince words.

The Twins got a discount for their risk taking. You can't argue that the phils did. No way another team would have given him this deal, and that is the definition of consumer deficit.

PECOTA is a reference point. Never ever take PECOTA as the end of the story.

If you look at the aging tables above, you will see that re-signed players do not age as PECOTA predicts, while players who sign contracts with new teams do exhibit this pattern. Additionally, I discussed the comparables that formed that projection, explaining why Howard's non-PECOTA characteristics have more in common with his more gracefully aging comparables.

The fact that Howard hits better with runners on is something that is common among the majority of players who defenses shift against: http://www.thegoodphight.com/2009/1/29/741980/there-is-clutch-or-the-cas I wrote that article last year detailing this process.

Howard hits more HR on the road, for one thing, and the stadium isn't going anywhere before 2017 anyway so he still gets to reap its benefits anyway.

Joe Mauer was probably a great deal, though it really depends on his health. Still, it will probably look better than Howard's contract. Alex Rodriguez's will probably look worse if you check his PECOTA, but I'm guessing he will age more gracefully than that as well. Put it this way: Mauer was a bargain, but that wasn't the opportunity cost of signing Howard. Mauer was off the market. Other deals for this period of time are not yet signed.

I don't think the contract is a great one, and I did say in the article it was a little high. I would have come in closer to $110MM or so. Still, just talking about PECOTA when I already looked at the PECOTA and decided where it was off is going backwards. Say why you think Howard will age like Cecil Fielder rather than Jim Thome. That would be a more compelling case.

I do have one question, Does your morp model make the phillies pay for say, not offering howard arbitration rather than picking up his old 2011 option (if i remember how the contract went)? Or say rollins' for that matter.

Also, I wasn't trying to dispute that there are reasons for howard hitting better with runners on, but that just contributes to the context dependency of his value, and one that might change if utley, rollins and co aren't as good as they have been in the last 3 years(they very well might not be).

Yes, the opportunity cost of letting Howard go in 2011 is one of my main arguments as to why I think the value was higher than I'd have paid. If the next CBA eliminates this compensation before the 2012 draft, I think that the deal would look much better and probably wouldn't be over market value at all.

Utley is around until 2013, and the Phillies will probably extend him after that. I think it's fairly reasonable that Howard will be able to assume the Phillies will put up some OBP in the 3-hole.

One thing I have in mind is the replacement value. What can the Phillies get with that 25 million after Howard departs? A younger A-Gon who is able to hit 35 HR while calling Petco Park home? That's why this is a bad deal. It will be a buyer market when Howard is a FA. No way he is worth 25... this is not a bargain at all. The Phils gave up all the leverage in possible negotiation of a reasonable deal.

Firstly, Adrian Gonzalez is only 2.5 years younger than Howard. Secondly, I'd bet he gets more than $25MM/year. He would get $25MM/year if he went on the market right now, but I'm guessing he breaks $30MM/year.

Both teams gave up leverage. The myth that future price uncertainty isn't already included in current prices continues.

It seems that the pure dollar figure isn't what people are up in arms about, but the timing of the extension, and the number of years involved. They are ot waiting for the market to develop, and not waiting for howard's 2 extra years of evaluation time to yield data to minimize the eval risk. These seem like major gambling decisions on future market condition and the strength of the team's scouting and baseball knowledge.

As I've said elsewhere, one of the most important factors here is market scarcity. An analysis of what the phillies could expect to get on the FA market etc can help put the howard deal in context.

Also, Howard is clearly not being evaluated by advanced stats, and given what we know about the phillies, it's reasonable to assume that the phillies were paying for stats that are overvalued. This is simply a "sabr" judgment, because the stats phils use to value howard are bad, they suffered some loss on that front. If they could get the same production from the market, but represented in less flashy stats, I'd say they would most likely get a much better deal.

Market scarcity is already priced into MORP. That's the whole point of market values is that they reflect scarcity. MORP says the current cost of a win on the free agency market is $5MM including the opportunity cost of draft pick compensation. It could stagnate making this deal a disaster or it could inflate making it decent, but the concept of scarcity is not a new concept that needs to be introduce. It's the basis of market values.

The Phillies don't use advanced stats to evaluate players as near as I can tell. They seem to be vaguely aware of them, but they are not using them in their analysis. Somehow, the groupthink on this has led to the conclusion that "if the Phillies don't use new school stats, they must focus on old school stats." That's ridiculous. The Phillies are a team heavily invested in scouting and health, which is the only reason that they've kept their heads above water while much of the league does better data analysis. I do not see any evidence this was based on RBI. I see evidence that the Phillies were focused on his workout routine and improved defense, and determined that he was unlikely to age poorly. If he maintains his value throughout this contract, it's a good deal. The question is about how much he declines, not about the stats which will decline.

Also, there is a HUGE phallacy in the "wait for the market to develop" argument which I cannot believe has gotten this far. The market could go in EITHER direction. If the market gets better, Howard requires more money to re-sign; if the market gets worse, he requires less. This is about taking on a risk, which is generally smart to do in baseball given the shape of the marginal revenue curve.

Put it this way-- if "waiting for the market to develop" was always a good idea for teams to do, it would always be a bad idea for players to do. Scott Boras would be in the poor house. His off-season strategy is tied up with hoping the market gets more expensive over the course of the off-season.

yes, price is scarcity, but i mean by scarcity something more specific here, something on the order of "how much talent is in upcoming fa classes" the baseball fa market is pretty limited, so i'd think there are large discrepancies across fa classes in terms of talent supply. because teams have different outlooks on their window of contention and so forth, the scarcity in particular fa classes and scarcity longterm affect teams differently. if it is the case that the upcoming fa class in the howard contract year is particularly sparse, then even though the longterm morp would not be affected all that much by the seasonal scarcity, a team with a pressing time window of contention would find that their own morp for that particular year is higher than usual. the inability to make decisions in the long term would mean the inability to follow the lower morp curve.

as for waiting for the market to develop, i don't think you should assume that the phillies are forced to sign him no matter what and thus eat all of the risk for high inflation. it is my assumption that howard is a pretty inefficient way of getting your wins for your money, so even if the general price of a win is hugely inflated in the future, you can still find some reasonable replacements at reasonable cost.

the point about scouting and athleticism is well taken. although attributing win value to on field performance is still an issue for the phillies. if they over value the rbi man in an rbi sequence, i do think that's directly attributable to bad stats. how they value rbis do matter, but yea it's not proper to assume that they value it in a dumb way. maybe they don't pay attention to stats at all and simply evaluate ability or something.

The "how much talent is in the FA class" argument is somewhat misguided as well. What is lost in that analysis is that players on the FA market are removed from their old teams. Yes, that year's FA class will potentially also include Albert Pujols, Prince Fielder, and Adrian Gonzalez, but the Cardinals, Brewers, and Padres (or whoever Gonzalez is playing for at the time) will now all be without a first baseman in these scenarios.

I'm not saying that the Phillies are forced to sign him. I'm saying that the Phillies have the altnerative of paying approximately the same price for wins as everyone else will at that time, so if they plan on being competitive, Howard may represent as good an option as any at the time. Under higher salary inflation, it could turn out to be an efficient way for the Phillies to get their wins. Anything near ten percent inflation with a modest rate of decline for Howard will make the cost of Howard's wins added lower than the alternatives on the market.

well, i'm not posing the fa class issue as an argument against howard's deal. i am only saying that it's an empirical condition that gives context to howard's deal, a context sensitive to particular team needs and the absolute amount of talent on the short term market. these are things that i think morp's scalar estimation of win value can't capture very well.

I agree that the market will depend on scarcity. The market always depends on scarcity. The reason that I unraveled a series of possible inflation alternatives is precisely because I agree with you that the market conditions are not set in stone and a number of possibilities should be considered.

my concern with the scarcity bit is that a bad fa class costs teams in win-now mode far more than it does teams in rebuilding mode, or teams that don't have a particularly pressing need for fa talent immediately and can choose when to sign a player they want.

You made some decent points, but probably could have done without the sarcasm.

PECOTA isn't an exact prediction system anyway, it projects the possibility that a player might perform to a certain level, if all things are equal. All things are not equal and projections change every year. You won't find an established player in PECOTA with a "Good" 5th-year projection compared to his current production because there is just a ton of uncertainty built in. PECOTA certainly isn't predicting that Howard WILL be a 1.6 win player in 2016, it's just saying he COULD be.

Matt, I found this to be the ONLY useful analysis on this trade on the internet today. Thanks for all the effort you must have put into writing it, and getting it to us when it is still timely.

Another terrific analysis Matt. More than ever I am beginning to think that your voice is one of the most important at BP because it doesn't take any school of thought at face value. Sabermetrics is about questioning things, not adhering to one particular system like PECOTA and calling the matter closed.

Well said, RYS. Neyer did a knee-jerk slam on this deal on the psychic network's site yesterday, and while he made what might be a valid argument and conclusion, it was simply a rant with hardly any supporting evidence. Swartz may end up being dead wrong on his analysis (either on the upside or the downside), but at least we know EXACTLY where he's coming from with his argument.

Seems to me that the marginal revenue model is really the key here. The phillies would need several things to break right in order for the deal to make sense:
1. howard produces within reasonable bounds
2. the rest of the team produces within reasonable bounds, so that howard's win added is applied when mr/win is high.
3. howard's contract does not prevent them from signing arguably more important pieces, at higher win/price.
4. general economic conditions are such that the revenue figures are as projected and inflation raises the price of a win.

also, we should take into account market scarcity. how many players of howard's caliber can be obtained, and the cost of doing so? if no direct replacement can be found, then the cost of replacing component production? it seems that they feel howard is on the same "tier" of franchise player as mauer, using bad indicators of performance like mvp awards and rbis. nevertheless, i think the main thinking for the team is that they don't think they'll get the same level of performance from the market or from their farm in the period, and they are trying to build an upscale team that can sustain high level of winning a la yankees/sox every single year.

the evaluation of the deal mainly depends on the market scarcity condition and their ability to actually resign the more efficient assets under their control. a big question here is whether the lee trade was in any way affected by the impending howard extension. if it is, then that is just a disaster.

My article used OPS to analyze his performance against LHP, which is already a quick and dirty measure. Your response is to use batting average? Ryan Howard is a low OBP, high SLG hitter against LHP historically. He's done better in his career against LHP than the average LHB. And most importantly, SPLITS STATS NEED TO BE REGRESSED TO THE MEAN IF YOU WANT TO PREDICT FUTURE PERFORMANCE. There's been massive amounts of research done on this topic.

Also, if you want to get into "HR vs. LHP" argument, at least look at the rest of the league. Howard LED THE NATIONAL LEAGUE IN HR VS. LHP in both 2006 and 2007, and was third in 2008. It's a weak statistic, but at least compare him to other people. Nobody gets 650 PA against LHP.

Matt - do you really think the "more HR to opposite field" thing is why some of those hitters aged well?

At first glance, that appears to be an indicator of their approach at the plate - and not their health - and I imagine health plays a much larger role than batting approach in determining how a player ages.

Nevertheless, you appear to have created an excellent new model. Kudos and thanks.

Thanks. I don't know if hitting more HR to the opposite field is the reason. The best case I've made in the past is that hitters who are pull-happy rely on reflexes to hit HR, while hitters who are oppo-happy rely on strength. Reflexes decline more rapidly than strength, I think. It's just a trend I noticed. The larger factor, like you mention, is health. The best argument for Howard aging well has got to be that the Phillies know his health better than anyone, and they have one of the best medical staffs in the league (they won last year's Dick Martin Award from BP).

you get a little more time to see a pitch if you're willing to hit it the other way. If slower response time is a symptom of aging, I could definitely see opposite-field tendencies correlating to graceful aging.

The bigger concern for me is the LHP splits. A *good* LHP *with a slider/curve* fillets Ryan Howard every single time. Witness 0/3 with RISP last night against Jonathan Sanchez. If I was in the NL East, I'd get one reliever who fits that description and stop worrying about Ryan Howard.

Pujols is going to get so much more than this that it's not even funny. If the economy improves and baseball keeps growing like it has been, I could absolutely see $40MM/year. I think the effect of one deal on the other is minimal, however. The opportunity cost of signing Pujols remains filling your team with a couple of 3-4 win players each at half his cost. Pujols' salary will depend on what teams are willing to pay him. Howard going off the market doesn't change what teams are willing to pay him.

I have no inside information. I doubt Howard contributes too much to inflation. I think the net effect on the market is one less 1B, which creates scarcity, but one less team who needs a 1B, which negates that effect. I think it's a clue into what at least one team is thinking the market will look like.

Matt, putting the analytic talk aside, the crux of your article seems to be that the Phillies know Howard better than analysts. That may be true, but there have been many instances in which team overvalue players on hand. Groupthink can cut both ways, and I don't think an analytic approach that rests on the assumption that the Phillies have avoided groupthink is going to put the rest of us outraged analysts at ease.

Aging curves vary wildly from player to player. I think an analytic argument of aging curves should look at the selection bias of aging curves for re-signed players versus newly signed players when they are so dramatically different.

The crux of my argument is whether the Phillies are right or wrong about his aging curve, and I give reason to believe that ignoring the fact that they watch him stretch and work out every day is dismissing very important qualitative information that is clearly correlated with quantitative trends.

I understand factoring in the cost of draft compensation when it comes to acquiring a player through free agency but do not understand why you are including draft pick compensation in your analysis when re-signing a player considering that:

1. it is an undetermined benefit - the value of the pick compensation depends entirely on who ultimately signs him;
2. they may obtain the draft pick compensation, if he leaves for free agency following the expiry of the contract;
3. they will have to pay to replace the lost wins, most likely in the form of picks or prospects.

1) It does depend on the team that would have signed him. It could really be anywhere from about $18MM-$27MM depending on who signs him. My guess is that it would probably be a late first round pick, so $23MM seems about right.

2) If the Phillies don't pick up his 2017 option, it means that they didn't want to pay him $23MM; if they offer him arbitration, it means they will have to give him a raise on his $25MM. If the Phillies do pick up his 2017 option, they have essentially valued him at least as much as $13MM for 2017 ($23MM salary minus $10MM buyout), but offering him aribtration would require a raise on the $23MM figure, so it's also unlikely.

3) The cost of paying for lost wins in the form of dollars and picks is what I am counting here. I think we agree with each other on this point-- I determined the dollar cost of those picks and included that in the price.

Thanks for the analysis and article. Your article includes this statement: "What the Phillies probably cannot afford is to spend $150 million a season on a .500 team that never nets them playoff revenue." I should know this but I don't - where does playoff revenue go? Does it go to the home team, both participating teams, all teams, MLB operations, other places, etc in various proportions?

One other comment. I don't understand this statement: "The myth here is that teams spend money to be nice to their fans, but only up until they reach some arbitrary budget, and then they stop. This is untrue: teams spend money to make money."

My experience is that teams don't follow an economists' ideal of matching marginal cost to marginal revenue. They don't consider player expenses to be investments, at least not financially. They have annual budgets, just like every other business. Do you have evidence to the contrary?

"Budgets" come about because firms first determine the cost function for different levels of revenue, and then select the level of costs that maximizes profits. Do they sit there with cost curves and their Econ 101 book? Of course not. But they behave in such a way that mimics this process.

This is a very important fact about economic decision-making. The best analogy I've ever heard is to consider a billiards player. What they are actually doing in determining how to hit the ball is solving a ridiculously complicated series of differential equations. But they don't pull out Matlab and a Physics professor every team. They simply have arrived at a process of arriving at the same solution by learning over time how to succeed at billiards.

Firms behave in a similar way. They don't take derivatives to solve every problem, but they seem to follow these principles. Owners typically know that the profits of a 81-win team and the profits of a 71-win team are similar, but the profits of a 91-win team are much higher than that of an 81-win team. Thus, when they feel they can only become a .500 team, they rarely spend money even in large markets like Washington. On the other hand, even smaller markets like Minnesota will spend money when they are on the sweet spot of the revenue curve.

They do this by authorizing General Managers about what their budget should be. The result is that people think only in terms of the budgets handed down to the GMs and think this is all that's going on.

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You remind me of hot-shot consultants I used to hire who thought they could model how my business worked but wound up adding no value. Total waste of money. The bottom line is that teams still have a budget based on what they think their revenue will be in the next year.

If you pay someone a certain amount of money from that budget, it represents less money for someone else. And budgets are typically based a year at a time, not for a three- or five-year period. The nature of baseball--in which wins can be hard to predict--makes long-term budgeting an intellectual exercise only.

The bottom line is that, if the Phils win less games next year, they will have less money to pay ballplayers. No amount of theorizing can refute that. Howard's contract is more than just a "sunk cost"--it's an actual payment due from a future budget.

I'm not interested in the personal attack, so I'll ignore that part of the comment.

As to the content of your post, I don't even know what to respond if you don't think that teams think winning and revenue are correlated, and don't consider whether they think they can be competitive when they set a budget. It's so far divorced from any anecdotal evidence about how owners of baseball teams spend money at all that it only reveals an inability to see budgets being part of any larger picture at all.

You remind me of an entry level 'think I'm a big shot' college graduate with a shiny degree that thinks they know how to 'fix' everything that's wrong. If the Phillies can choose to spend an extra $25M in 2012 to make an additional $30M, they will do so, whether that pushes the budget from $75M to $100M or from $425M to $450M. Even if they were losing $50M a year, spending the $25M to make $30M means they are only losing $45M.

Looks like a serious disaster to me. Baseball writers, fans in general and apparently GM's have relatively little notion of the 30 and crash age group. A-Rod's salary is a disaster as well, similarly aged at the time of signing and similarly likely to decline, potentially rapidly.

It wouldn't surprise me at all if Howard looks like Jim Thome with less walks in 4-5 years, - .250/.300/.500, bad defense - at $25m/year is a total disaster.

Did you read the article or did you just show up to hate? As that section explains in detail, it's a sign that the Phillies are planning on spending money during that time period. That doesn't even mean it's smart for them at all. I like it when Starbucks buys comfortable chairs, as their customer, but that's separate from whether I find it wise for them to do so.

If you would like to refine this analysis, then start looking at how you valued the option. Your methodology is flawed. A nice refinement would be to adapt a Black Scholes-esque type of option pricing model applied to financial assets to this situation. Obviously, the other variable (salary inflation, etc.) have a larger impact on value in this case...but this could be a nice (and not all THAT difficult) refinement.

I'm not quite sure what Black-Scholes would have added. It's been a decade since I actually did Black-Scholes, so forgive me if I'm misremembering, but isn't what I did equivalent to Black-Scholes with no time lag and a uniform distribution instead of a normal one? I doubt the added value would be worthwhile anyway, given the fact that these are only approximations anyway.

Sorry. Not intended as a critique of MORP or of your article. I am always happy to see the real world applications of theory, and I very much enjoyed the article. My comment is that the valuation of options in baseball contracts has not been approached (to my knowledge) in a rigorous fashion. The tools are out there to do so. The main drivers of option value are the underlying volatility in the value of the underlying asset (which can be approximated), length of time until expiration, strike price, etc. Black-Scholes provides one approach to tackling this. Someone should take a crack at it (and it ain't gonna be me).

Thanks for your involved discussion of your model. Forgive me if you've explained this already, but how do you price the value of compensation picks when you may not have to provide them? It's easy to value the picks alone, but you only will end up providing the picks if providing picks is less costly than offering arbitration. Depending on circumstances, offering arbitration may be far less costly than providing picks or far more costly. So how do you deal with that?

I discussed this more in the MORP series and it took some time so I won't go through the details. I largely based my estimates on a model developed by Sky Andrecheck at BaseballAnalysts.com. It is linked in the previous article. He does a terrific job of approximating career production by draft picks, and I simply rescaled it to look only at the first six years of contracts, arbitration money, and rescaling to fit WARP3 instead of WAR.

There was a good deal of guessing that had to be done to determine which deals came at the cost of picks, but I was able to infer the answer pretty clearly from the outcomes in most cases. There were some judgment calls, but not major enough to change the $/WARP figure much.

Thank you Matt. Great article- "The reality is that Howard falls somewhere between these two extremes" hits it right on the head.

IMO, this signing also illustrates some aspects of Amaro/Phillies decision-making:
1) He does not wait for the market to fully develop- as in contracts for Ibanez and Polanco. This risks overpayment, but he gets his man.
2) This deal almost certainly prohibits re-signing Werth- as in how they shipped out Lee when they acquired Halladay.

I agree that Werth isn't going to resign, but I don't think it's due to this deal. If Werth is willing to take '2nd tier' money, then he'll say a Phillie. But in the FA market, some team that needs outfielder power is going to pay him more than he's worth to the Phillies given the rest of their lineup.

I have a hard time believing that the benefits of waiting another year to negotiate the extension are outweighed by the risk of high salary inflation. Even if they had to pay a little more, they would also have another year to assess the long-term risk. Sure, the contract may not wind up being horrible, but the timing is still inexplicable given the lack of a discount.

If the Phillies were in the AL, that would be one thing. Thome last played 1B as a Philly in 2005 (age 34). How did that work out? Now you have a guy in Howard with a tendency to carry a lot of weight around, who has just been made incredibly rich regardless of what happens the rest of his career.

If Howard has even one injury-plagued season during the extension, it makes it very unlikely he produces anything near the contract value. McCovey, held up as an example of a positive scenario, produced 2.5 WARP at 33 and -0.4 WARP at 34, before having two good years. Stargell, an outfielder (can you imagine Howard in LF?), produced 1.7 WARP at 36. And those are the good comparables.

There's always a chance everything just works out swimmingly. But the odds are a lot worse than the article implies. If father time catches up to Howard, either though injury, reduced mobility, or reduced offensive ability, then the contract is an albatross. The perfect-world scenario is too unlikely to justify the deal.

I'm not cherry-picking. Look through the list of players and their aging curves. It's not a perfect match, but the more extreme pull hitters decined more rapidly on average.

Thome's WARP numbers would absolutely be satisfactory for Howard. Just 2005 looked bad. He was pretty sick in the other years. One bad year would not make the deal useless if he had a couple very good years or one spectacular year. There are a lot of paths that this could take. That's my point.

I'm not saying it's a good deal. I'm painting the scenarios in which it works out well. There are a number of scenarios that aren't far-fetched.

I like that worse. That would probably hurt their ability to spend money in 2012 and 2013, while they could simply continue with back-loaded contracts to whoever they sign in 2014-16. Money is worth more now. Effectively, by getting paid more in the less productive end of his contract and getting paid less in the more productive end of his contract, the Phillies have effectively borrowed money from Ryan Howard.

Seems like you are cherry-picking by comparing Howard to Thome on your chart of HR % to opposite field. Thome is up there. Aren't some of the other players who hit a high pct. of homers to the opposite field (Juan?) Gonzalez, (Mo?) Vaughn and Richie Sexson? They didn't really age well did they?

Oops, I responded to this post above as part of my response to the other post. But the point I made is that it's not a perfect correlation but the oppo-mashers on that chart did age better than the pull-mashers on that chart on average.

Matt, responding to your previous post, I did read your article in detail and didn't "show up to hate." In fact, I posted a review of it at THT. I'm sorry you find my comments hurtful, but I've certainly received a lot worse and not minded.

Good stuff, Matt, but I still have a minor concern about the estimated difference between re-signed players and new-team players. I went back to the original articles, and I don't think you've quite addressed the concerns about age bias.

Ideally, you would do your comparison within age cohorts, comparing players who got 3-year deals only if they were the same (or similar) age at the time of the deal. I'm guessing that the problem is that this would knock your sample size down into the "don't bother" range?

You might try 3-year age cohorts -- 29-31 at the time of new contract, 32-34, and 35+. I'd be curious to see how much of the durability advantage for re-signed players persists when you do that.

The problem I have is that it only appears to be an acceptable deal (at best) depending on market prices. While it's fun to guess how much something will or will not inflate, it's a bit presumptuous to me to even guess that a win will be worth 8 million in 5 years.

Even if it was worth 8 million, I don't think it represents what a player should be paid. Like analysis constantly remind us with WAR/Dollars over at FanGraphs, they are not absolute figures. In other words, whatever their dollar amount says they "deserve" to get paid isn't actually what they will or should get on the open market. I think the same applies here. Just as I think the guys at FanGraphs take their WAR a bit too literally, I think you might be taking MORP a bit too literally as well.

This, of course, is besides the fact that the age regression and assumption about Howard's production seems largely tied to the concept that the Phillies know Howard better and that somehow will mean superior production than others on the same age curve going forward.

Perhaps it was not your intention, but to me, it came off as if you read a bunch of opinions in the sabermetric community bashing on the deal, and you wanted to take a contrarian opinion on the signing, and sort of went looking for possible scenarios in which the deal was defensible.

Nobody for sure knows how it works out, but given the context of the signing (at least a year before it was probably necessary), the amount, age, and the fact that it's barely defensible even if we take a long look and give the Phillies every benefit of the doubt, the most likely scenario has to say that this was not a good idea.

Every time a new huge and long deal comes out, people look at the contract and assume there will be little inflation and determine it's a disaster. With the exception of the last couple years, this is overwhelmingly a mistake when it is done. Assuming a lack of salary growth in a rapidly expanding industry seems far more likely to be a presumptuous assumption.

I hardly think it's fair to say I'm taking MORP too seriously or misapplying it considering I only introduced in five days ago. I have a pretty good sense of what it represents, which is the opportunity cost of a win on average. That seems to me like an excellent way of assessing whether a deal was smart or not.

This article took a lot of time to write, and hardly represents some sort of contrarian cooking the books. I have been hammering the point about the differing aging curves when you compare re-signed players and newly signed players for weeks. It was my exact response to the Mauer signing as well, which also represents a player where there is a lot of inside information that the team has on the player's health. What I tried to do was look for what kinds of scenarios would make the deal worthwhile and what kinds of scenarios would not. The majority of the sabermetric community appears uninterested in considering the variance in performance and the variance in inflation to simply arrive at a sure answer. Instead, I attempted to look at a range of possibilities objectively without the dogmatic claim to predict the future with certainty simply because I have a weighted mean. I looked at the distribution instead of the weighted mean, and discovered that the contract was probably not a good one, but hardly the disaster that sloppy analysis suggests.

Matt, you go on about all the uncertainties involved i.e. inflation, aging curves, free agent market, etc. But ultimately we all have to make an educated guess on what those will be. The Phillies are guessing that Howard 2012-16 is worth $125M. PECOTA is guessing 10.7 WARP. What's your guess?

Well, he was worth about 4.5 WARP on average the last three years. For the sake of picking numbers, I projected he'll start the deal a 4.0-win player and end it a 2.8-win player, so maybe 17 wins over that time period. If I had to guess, he'll probably end up being worth only $110MM over that period after taking into account the two picks he cost the team. I would put huge error bars on all of that, so please keep in mind that I'm just picking for fun.

Matt: Does your analysis take into account the feedback effect in play here? If Howard underperforms during a year, the Phillies win less, which makes his wins less valuable economically, which then impacts the value/win of every other player on the team. Does the rate of return on over-performing in a particular year even out the rate of loss on underperforming?

And, I think that Howard's contract has maximum value in years in which team wins move them further towards the playoffs. Howard's wins are actually worth most if the Phillies are winning in the low-mid 90s each year, rather than if they're dominating at 100+ wins, yes? Does evaluating his contract's worth require predicting the Phillies WL record and the NL playoff picture for the years of the contract?

Great questions. Thank you for these. I think that I have taken these into account implicitly, but they hit at the heart of the economics of baseball. I'll do my best to answer them well, but please ask me to clarify if I am unclear.

The marginal revenue of a win is most for teams on the playoff bubble. Of course, there is no way to know exactly how many games you and your division rivals will win. One win for the 2007 Mets would be worth tens of million of dollars in expectation, and one win for the 2007 Phillies would be worth only a few hundred thousand in all likelihood. Since the free agent market is actually an auction, the prices reflect the second highest bidder's valuation of the player's services. Mostly, this would mean that they reflect the value of a player's services to a team on the bubble. This actually means that 1 win is worth itself in the standings (ignoring playoff implications) PLUS a 5% increase in the probability of making the playoffs. A 4-win player represents four wins in the standings plus about a 20% increase in the probability of making the playoffs. Thus, this is pretty much exactly what is being paid for by teams. So the price of a win is basically a competitive team's estimates of the long-term revenue implications of one win in the standings and 5% higher playoff odds (and naturally, all the variance in possible outcomes upon making the playoffs).

Thus, Howard's contract takes into account the possibility that if he takes a Phillies team that would otherwise be three games back in the division and makes them win their division by one and that they happen to win the World Series that year, then he will have been worth like $100MM (to throw out a number) to them. It takes into account the possibility that he takes a team that would have won the division by one games and makes them win by five games in a year that they lose in the first round, and thus makes the team $1MM or $2MM. It takes into account all of these things.

The only thing it really assumes is that the Phillies are pretty much competitive going into each season for the contract. Now, if the Phillies turn into a bad team, the contract will be a bad one if they are stuck with him. Of course, they can trade Howard at that point. They would likely have to eat money, but that's fine, because back-loaded deals effectively entail paying for early-years' performance later on, so eating money in a trade would be exactly that. It also takes into account the variety of ways that Howard's performance may change so that if he turns into the best player in baseball or replacement level, trades in all scenarios are priced in.

I just wanted to follow up on Dr. Dave's comment about not including age in the analysis of free agents re-signing with their own team vs. signing with a new team. In a comment on one of your earlier articles, you said that you had looked at age and that didn't seem to be the cause. Can you go into a little more detail about that?It seems like including players whose deals were signed before they reached unrestricted free agency would naturally bias the data towards the players re-signing with their own teams. Those are players who were unable to sign with other teams and are, I think, younger than other free agents, so they're more likely to be in the "aging slowly" part of their careers.

Matt,
Just wanted to say that while I'm not sure I fully agreed with your conclusion about what's most likely, I loved the way you laid out the different scenarios here and considered the value under different scenarios. I think this is a much more informative way of looking at things, allowing the reader to reach their own conclusions based on which set of assumptions they feel is most likely while also making a compelling case for the assumptions you find most valid. Really nice work.

I agree with the main thrust of this. This was not a good deal but there is a decent chance that it is not a terrible one. It is perfectly reasonable to project the risk of inflation is greater than the the risk of injury.

The premise that the Philles know more is something I question. If this is true, the risk is reasonable but analysts don't (and should not) have to trust the Phillies on this. Their analysis doesn't necessarily deserve more weight just because they see him every day. PECOTA has flaws and so do the Phillies scouts/medical staff. It seems that the numbers are inclusive at best.

The hypothesis about pull hitters is neat but Howard is a pull hitter and reflexes are important to hitting and defense too. There are a lot of reasonable questions about projecting the performance of unique player like Ryan Howard. Perhaps with so many questions, waiting a year would have been best.